Today I Have Hope for Real Bankruptcy Reform

On January 6, 2009 Sen. Dick Durbin intruduced Senate bill 61, known as the Helping Families Save Their Homes in Bankruptcy Act. Identical legislation has been introduced in the House by John Conyers. One of the objectives of this legislation is to give home owners the same ability to modify their home mortgages in Bankruptcy that rental property owners already have.

I have blogged before about the fact that if you own rental property and file for bankruptcy, you can modify the terms of the mortgages secured by those properties. Under the right circumstances you can change the principal balance, reduce the interest rate, change the monthly payment amount, even modify the right to assess and collect certain fees. If you live in the house securing the mortgage, as a general rule; you can’t change anything. You can cure an arrearage if you were behind on the mortgage at the time that you filed, but it must be done in accordance with the terms of the note and mortgage.

One of the results of the Durbin/Conyers legislation will be to level the playing field. I am a member of an organization, the National Association of Consumer Bankruptcy Attorneys, that is fighting for this right for our clients in Washington. We need your help. Contact your Senators and Representatives now.

To my mind there are three important points in favor of this legislation.

First, in a Country that is supposed to encourage home ownership it strikes me as wrong that landlords get better treatment in the Bankruptcy Courts than homeowners.

Second, one of the problems behind the credit crisis gripping the world economy and devestating retirement accounts and any hopes of a balanced Federal budget, is that no one really knows where mortgage losses (and other consumer debt losses) are going to stop. Modifying the mortgages will accelerate the pain, but it will help determine its full extent.

Finally, the bank lobby is telling Congress that this bill will increase the cost of mortgage loans for borrowers. In fact, they are saying essentially the same things that the Credit Card lobby (more bankers) were saying about Bankruptcy reform in 2004. According to the credit card lobbyists passing Bankruptcy reform was going to reduce the costs of credit for the average American to the tune of $400 a piece per year. Well, I don’t know about you — but I haven’t gotten my check yet.

Maybe, it is time we address the root of the financial problem instead of simply throwing more money at the banks whose rush to invest in securitized loan products that paid too much, carried too little risk and nobody really understood in the first place created the biggest mess in our lifetimes.